Understanding gratuity in your employment letter

Have you completed five years in a company and are planning a change? Don’t forget to collect your gratuity from your current organisation. Gratuity is a lump sum amount paid by an employer to the employee as a sign of gratitude for the services rendered by him/her during the period of employment. 

However, it is only paid when the employee has completed a minimum of five years of service with the organisation. The period of services has to be continuous, without any gap in the services of the employee with that company. Though generally, employers pay gratuity at the time of retirement, it can also be paid during the period of employment as well.

The gratuity rules are mandated under the Payment of Gratuity Act, 1972 and came into force on September 16 of the same year. 

Eligibility

Any employee, contractual worker or temporary individual who has worked for at least five continuous years in any Government or non-government organisation is eligible for gratuity. It is important to note that if an employee’s service is interrupted due to leave, accident, sickness, lockout, strike, layoff, termination of work not caused by the employee, or absence from duty without leave, he/she is still eligible for a gratuity amount.

Calculating Gratuity

It is calculated based on the individual’s last drawn salary and years of service. As per the Act, if the gratuity amount exceeds 20 lakhs, it is taxable. It is otherwise exempted from tax.

Formula : 15 * last drawn salary * tenure of working/ 26

The last drawn salary means basic salary, dearness allowance and commission received on sales.  The above formula is based on 15 days of the last drawn salary for each completed year of continuous service. 26 days is used for calculating gratuity as the number of days in a typical work month specified under the Payment of Gratuity Act.

As per the rules of Payment of Gratuity Act 1972, an employee can be denied gratuity if he or she has been terminated for committing an offence involving moral turpitude or shows riotous, disorderly conduct or is involved in any other violent act. But it should be noted that an organisation cannot refuse payment of gratuity to an employee on account of bankruptcy.

Thus, if you have completed your five years in an organisation, and are on the lookout of another option, do remember to pick up your sizable gratuity amount first.